Moore's Law on Steroids: World Computing Power for One Type of Calculation is Doubling Every Three Weeks

One fact made me immediately suspicious that maybe they do not: If the equipment's return were so good, why don't specialty BTC mining equipment makers just use their own product to mine? Why do they sell the machines at all?

I can understand why, say, Caterpillar does not get drawn into the coal mining business just because it makes equipment for it. There is a LOT to succesful coal mining beyond just having a good dump truck. But in Bitcoin mining, the equipment is literally everything. These devices are essentially plug and play -- plug them into the network and point them to a mining coop and one is earning Bitcoins

And perhaps this is what happens in the back rooms with the first production units of a new generation. But as far as public availability is concerned, it turns out that most of these devices are priced such that they do not make money for the buyer at current Bitcoin exchange rates. Essentially, the manufacturer has built the expected value of the equipment's mining output into his equipment price, and thus the only way to make money is to bet on rising BTC exchange rates. These manufacturers remind me of folks like Mark Hopkins and Collis P. Huntington during the California gold rush, who recognized that the best way to make a fortune was to sell goods and equipment to the miners rather than mine themselves.

But to make the purchase decision even dicier, next generation technology, such as the new 2TH/sec machines, are typically sold on 3 month advance purchase contracts. This creates another interesting dilemma for the buyer. On the day that one pays for them, these machines look like the road to riches at current mining difficulty levels. But one does not actually take delivery for 3 months, over which time mining difficulty rates will have steadily climbed.

Let't take an example, and consider the Cointerra TerraMiner IV, a 2TH/sec machine priced at about $6000 which if purchased today would be delivered sometime in February, or about 3 months from now. At current difficulties and exchange rates, such a machine would pay back its purchase price in less than a week, producing over $25,000 a month in Bitcoins.

A no-brainer, right? But Bitcoin mining difficulty has been going up of late by a factor of 10 every 3 months. Based on a mining difficulty ten times greater than today and current exchange rates, we could expect instead to be making at delivery something more like $575 a week. Three months later we would be making a tenth of that. If we factor in the costs of electricity, this machine will never cover its costs at current Bitcoin exchange rates.

I do not think I have ever seen a business technology obsoleted so quickly. Essentially, the next generation of mining processors will be virtually obsoleted between the time of its sale and its delivery 3 months later. Every three months one has to reduce his production costs by a factor of 10, in a business where cost reduction basically means throwing out all one's existing capital assets and buying expensive new stuff.

This arms race is driving tens of millions of dollars of new equipment investment every month. If the return on these purchases is so chancy, then the obvious question is why are people still buying? One possible answer is that miners are essentially speculating on Bitcoin exchange rates. And there is certainly a land rush aspect to Bitcoins. Just as people often say, "they aren't making any more land", there will never be more than 21 million bitcoins. There is a capped supply that will never be inflated or fudged by Ben Bernake, and there is a growing worldwide demand to find hedges for and alternatives to traditional currencies.

But the problem with this answer is that if I want to speculate, I can go out and exchange physical currency for Bitcoins today. It is a simple process, far more simple than paying cash for a machine that will not arrive for three months.

So what other explanations can there be? Here are a few ideas:

Mining uses spare computing capacity that exists already. This in fact was what lured me, briefly, into the mining community. But as Bitcoin difficulties have increased and purpose-built mining equipment has become the norm, this explanation no longer holds.

People are fooled by what are effectively teaser rates. As mentioned above, new equipment bought on advanced purchase contracts looks very profitable at current difficulty rates. It turns out that few people really have a good intuition about compounded rates, and so may underestimate difficulty changes in the future. Heck, until the pace slowed down a bit over the last few weeks, the graph of Bitcoin mining capacity was upward curving on a logarithmic scale. No one has an intuition for that.

Mining fulfills an age old fantasy of printing money. There is something oddly compelling about having a box in a closet that runs for 24 hours and just finds money for you.

In certain countries, mining may have tax and secrecy advantages over buying Bitcoins directly. And if there were ever a community that would be willing to pay a premium for secrecy and lack of traceability, this is it.